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Alumina Ltd’s (ASX: AWC) Commodity Price Change

Alumina is effectively a forwarding office for AWAC profits. Its profits stem from its equity share in AWAC, less local head office and interest expenses. While AWAC enjoys a low operating cost position relative to its competitors, the cost curve is relatively flat, and competitive pressures exist via supply from China. Alumina was the result of a demerger of WMC’s aluminum assets in 2003. AWAC has substantial global bauxite reserves and alumina refining operations, many of which are in the lowest quartile of the cost curve.

Key Investment Consideration

We expect aluminum Ltd’s (ASX: AWC) demand to grow considerably in the future, with global consumption benefiting from transport’s electrification. Supply in China that is managed by state-owned enterprises will prove sticky, with little capacity being cut even if aluminums prices decrease considerably. Alumina’s production has declined over the past five years as it closed capacity in a bid to reduce costs. With no major expansions planned, the company will continue to operate in maintenance mode.

Financial strength

At end 2020, AWAC (Alcoa World Alumina and Chemicals) had USD 361 million in net cash, marginally improved on 2019’s USD 340 million. And at end June 2021, Alumina had just position of USD 5.7 million in net debt, also marginally improved. Historically, AWAC reinvested heavily in its operations at the expense of dividend growth. We expect the company to remain largely in maintenance mode, with no major projects planned over the foreseeable future. Therefore, AWAC should pay out most if not all of its operating cash flows in the form of a dividend to Alumina Ltd. and Alcoa. This will help to maintain Alumina Ltd’s strong financial health. We expect AWAC to remain unleveraged and Alumina to remain modestly leveraged at worst.

Bull Says

  • Alumina is a beneficiary of continued global economic growth and increased demand for aluminum via electrification of transport.
  • AWAC is a low-cost alumina producer. It has improved its position on the cost curve relative to peers through expansion of low-cost refineries and closure of high cost operations.
  • The amended AWAC agreement ensures that Alumina will be able to maximize value for shareholders and makes it a more attractive acquisition target.

Company Profile

Alumina Ltd. (ASX: AWC) is a forwarding office for Alcoa World Alumina and Chemicals’ distributions. Its profit is a 40% equity share of AWAC profit, less head office and interest expenses. Its cash flow consists of AWAC distributions. AWAC investments include substantial global bauxite reserves and alumina refining operations. Declining capital and operating costs and a lack of supply discipline from China are likely to result in competitive pressures, but Alumina’s position in the lowest quartile of the industry cost curve is defensive.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Williams’ Deepwater Whale Project One of Several High-Return Growth Opportunities

 The 2018 consolidation of William Partners strengthened Williams’ financial position and lowered its cost of capital. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets.

Most of Williams’ growth investment will be directed toward Transco expansions and projects to reduce carbon emissions. Transco capacity will reach 20 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats.

Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strength

Williams has strengthened its balance sheet and dividend coverage in recent years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and possibly repurchase shares starting in 2022. 

Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders.

The flip side was an improved credit profile, higher dividend coverage, and ability to invest in growth without issuing equity. Williams remains engaged in litigation with Energy Transfer over its $1.5 billion payment due to Energy Transfer for its alleged breach of the merger agreement. Williams is seeking damages from Energy Transfer as well and to date has not reserved anything for the $1.5 billion potential payment.

Bulls Say’s 

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles.
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future.
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Profile 

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

NRG Energy Continues Its Move towards Consumer Services Business Model

The company remains on track to meet our full-year outlook, which includes an estimated $1 billion gross negative impact from winter storm Uri in mid-February, in line with management’s guidance. Our fair value estimate includes a $2 per share reduction to reflect storm losses partially offset by near-term cost-savings benefits and long-term benefits from changes in Texas energy markets that should favor NRG.

After closing the $3.625 billion Direct Energy deal in January and several moves to shrink its power generation fleet, NRG is on a path toward becoming primarily a retail energy services company rather than an independent power producer. It already ranks among the largest retail electricity and natural gas companies in the U.S. and plans to expand its customer base in areas outside its core Texas market. Although this strategic shift changes NRG’s fundamental value drivers, we still don’t think it can establish a long-term competitive advantage that would warrant an economic moat.

Management reaffirmed its $2.4 billion-$2.6 billion EBITDA guidance excluding storm impacts for 2021, in line with our estimate. Management has pulled back substantially on its debt reduction plan and now targets $255 million of debt reduction this year, down from its pre-storm plan to retire $1.05 billion of debt this year. share buybacks and dividend growth will become top capital allocation options in 2022 as NRG pushes back its timeline for achieving investmentgrade credit ratings.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 22 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.